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Sticking With Strong Defense

Sticking With Strong Defense.. But Making Our Shopping List


Since the Federal Reserve spiked the punch bowl last Thursday, we have seen nothing but persistent selling pressure in the stock market.  Bonds have done a little dance in place but not made headway and most benchmark commodity stocks are losing 2-5% daily.  This is that time when you want to dump and hide expecting the worst as a retest of the August lows appears likely.  This is also the time to make a shopping list and ours is getting longer each day.


Failure at the Inflection Point


Thursday of last week now looks like a classic stock market failure at the inflection Point or “Red Zone” as we called it in our 9/1 Red Sky Report (http://www.allseasonfunds.com/redskyreport/09-01-2015-inflection-zone )


In the last few days, we have seen several things happen that make a retest of the August lows seem likely.  First, we have seen European Index funds, Latin American indices and unhedged Japan indices make new lows for the year yesterday.  China is not far behind.  Second, 72 stocks of the S&P 500 also quietly made 52 week new lows yesterday while the index is still 4.25% above those lows.  Now let’s remember what we’re talking about in terms of “the lows”.  Graphically, on a closing basis, the lows for the S&P 500 is 1867 and the Dow, 15,666.  However on an intraday basis on the 24th of August, both benchmarks reached another 2% lower during the day which, to me, is the real “low” we need to be aware of.  I have seen many instances of a retest of the intraday lows that holds firm while on the surface, it looks like a failure based on closing prices.  These are the best setups for very strong rebound rallies and quite often the beginning of new bull market uptrends.  Still we’re talking about some significant downside from yesterday’s close either way.  Once again, we are not married to any outcome including a successful retest or failure of “the lows” at this point.  We are simply recognizing new selling pressure since last Thursday, which occurred at a rather obvious time and place as discuss in our previous note.  Since last Thursday, we have slightly raised cash again, almost to absurd levels, selling our small bank and semiconductor positions and adding a small well run income fund to our Blended Asset and Income strategies.  That’s it.  Our Net Exposure screen never made it past neutral so we had no reason to increase our net exposure.  The screen is now angling back into bearish territory.  Current cash ranges for our investment categories remain as follows:


Tactical Equity                       35-45%

Blended Asset                        46-62%

Income                                   60-84%


That’s a lot of cash… looking for a new home


Developing Opportunities


The nice part about nasty selling cycles is that all the junk gets washed away while good stuff doesn’t see as much selling or can even gain some ground.  Don’t confuse the term “good stuff” with things like short funds or gold, which are really hedges and fear trades.  No I’m talking about relative strength among sectors, styles and asset classes and we’re beginning to see which groups might be queued up for a big bang higher once the market stabilizes.


Value based investing styles have been hammered for the better part of five years now especially in the world arena.  Our High Dividend manager, Sean Powers sent this to me last week and it sparked my interest.  What you’re looking at below is a relative price chart comparing all things Value oriented to all things Growth oriented.  Value plays tend to be in non-cyclical sectors, pay dividends and trade at discounted valuations to peers or the market.  This is the domain of the Warren Buffets and David Dremens of the world.   As the chart shows, the MSCI World Value index is now at the same relative price level as it was in early 2000, again relative to the growth world.



Who cares?  We all should.  I have a small group of mutual funds that I keep my eyes on who are truly best in class in terms of management and commitment to style.  Longleaf Partners fund (LLPFX) is one of eight that I like.  Below you will find a chart of the LLPFX (in red) compared to the S&P 500 (in Green) from 1995 to the year 2007.  LLPFX is really on the small cap value side of the matrix but look what the fund did specifically around the year 2000 and beyond.  It continued to march strongly higher right in the face of a near 50% decline in the broad US stock market. 



Again, relative performance of the value sector is right back where it was in the year 2000.  Could we see a repeat?  Based on the shear volume of very juicy value plays out there now, especially in financials, banks, oversold commodities, energy, emerging markets, and China (yes China), I know these guys are looking at a very long shopping list.  For the first time in nearly a decade, we might find ourselves taking positions in some of our old favorite value funds and let them do the decision making of what to buy.  I think we’re getting very close to that moment.


Dividend payers and MLPs are also on our radar now as well.  Both are back in play now that the Federal Reserve has pinned themselves to a zero interest rate policy for the foreseeable future.  Both groups will have to stop falling of course but wow do I see some attractive yields and deeply discounted stock out there.  Our All Season strategy, which has really underperformed this year, is looking to add some exposure here in the next 2-3 weeks.  Not kidding, I’m seeing 6-8% yields on stocks/ MLPs that are trading at half the market valuations.  But so far, value has been a trap.  I know, I’ve been caught more than once this year, thus some of the pain in All Season.  This round, it seems best to just let everything clear out including broad market selling pressure and pick up the good stuff on the other side wherever that lies.


I will shamelessly say to all those who are in a position to add to your investment accounts with sideline cash;  Do it now.  There are some clear and present opportunities developing. 


That’s it for this fine Wednesday.


Enjoy the Fall – top of the leaf colors here in Colorado


Sam Jones